Fed President Lacker Contextualizes Economic Hope for 2014

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, made definitively positive economic statements in a speech Friday while addressing the Risk Management Association’s Richmond chapter. Lacker’s economic outlook for 2014 was largely optimistic but tempered by recent history.

Lacker said he had hope for the upcoming year based on 2013′s upbeat year-end economic data. In the third quarter, gross domestic product growth the strongest seen in recent years, he said, and the strength may spill over into the fourth quarter.

Consumer spending was portrayed in good economic light, as well, having “surged” toward the end of the year. “That’s notable because growth in consumer spending has averaged just above 2 percent per year for most of this expansion, which is a good part of the reason real GDP has only grown at about a 2 percent annual rate,” Lacker said.

While these are positive indicators, Lacker does not think they can immediately erase the mentality of the most recession. Ever since the recovery began, economists routinely expected GDP growth to reach 3 percent. Instead, in 2011, and 2012, it was 2 percent. During the first half of 2013, real GDP growth hit 1.8 percent.

Lacker then went into specifics about the recession and the effect it had on the American public. Between 1983 and 2007, GDP growth averaged 3.3 percent per year, and personal income kept pace with the growth. There were only two brief economic downturns, and consumer spending grew at rate of 3.6 percent annually.

Household wealth grew during the pre-recession period, he said, and “the ratio of credit card debt to personal income rose from 2.4 percent in 1983 to 5.5 percent in 2007.”

Then the Recession hit, and GDP decreased 4.3 percent over six quarters. The unemployment rate rose from 5 percent in October 2007 to 10 percent two years later.

“The value of household holdings of stocks and mutual fund shares fell by $5 trillion, and the value of household equity in real estate fell by $3.9 trillion,” Lacker said on Friday. “ The scale and scope of the loss in income and wealth experienced by Americans was far greater than anything they had seen in the previous 20 years.”

In the aftermath, it is not surprising that lenders and consumers have re-evaluated their respective habits. As a result, credit has become tighter and consumers are less willing to spend. Businesses have been impacted too, and employers have been less willing to hire. There are also new governmental regulations facing employers, which has discouraged the pace of hiring.

Lacker said the government did not lend a helping hand when it came to the constant threat of shutdowns. However, the recently reached budget agreement added to Lacker’s optimism. On Thursday, the Senate passed a $1.1 trillion spending bill, which finalized the bipartisan budget. President Barack Obama has agreed to sign the bill.

“The sooner we resolve uncertainty about how the costs of those fixes will be allocated, the better off we will be,” Lacker said during his speech. “Dealing with the federal budget sooner rather than later would allow spreading the cost out over time, which would reduce the ultimate burden.”

Lacker said he was “struck” by accounts of employers unable to find employees whose skills match the job requirements. The trend of declining labor force participation makes it unlikely that employment will soon mirror pre-recession levels.

On Thursday, former Fed Chair Ben Bernanke also discussed decreased labor force participation rates. Bernanke said the trend had started before the recession, but it is possible the economic crisis worsened the situation. Bernanke thinks the employment level will eventually return to growth rates seen before the sharp decline.

Lacker made points about recent events and the psychological impact of the recession to contextualize predictions about economic growth. He forecasts real GDP growth will be around 2 percent again, saying that it may continue at a rate slower than past rates.

“But our economy is by no means stagnating; productivity is rising, incomes are growing and innovation is occurring,” Lacker said in his conclusion. “Consequently, I believe, a broad perspective suggests a fundamentally optimistic view about our future.”